INVESTING

INVESTING; In the Race for Gains, Funds Trail S.&P. 500

By Susan Antilla

Published: October 31, 1992

WOULD you even consider a complicated investment with a history of lagging the stock market averages? Of course you would. Chances are you already own a mutual fund.

Investors have stampeded into funds over the last 10 years, lured by the ease of choice and instant diversification they offer. In 1982, when investors could choose from 857 funds, it made sense to shun the complications of picking companies from among the 1,526 listed on the New York Stock Exchange. Why get involved in all that research on individual stocks when there was an easy choice to be made among simple, professionally managed funds?

Not fancy enough for you? How about a fund that invests in other funds? Or an international fund that hedges its bets in the options and futures markets?

Not so fast with the sprinkles. We have more choices ahead.

The next hurdle is understanding fees. Funds with front-end loads hit you up for a commission of 3 to 8.5 percent right away. Depending on the expertise of the fund's managers, it could take a month, a year or forever just to get back to the dollar amount you invested in the first place.

Rear-end loads are commissions that are paid when you sell. Hang on to a fund long enough and you might not pay at all, since there are "declining rear-end loads" on many funds.

Along with those costs, there is also the possibility of a 12b-1 fee, the fund industry's ingenious method of charging current investors for the marketing costs to lure future customers. Then, of course, there is the annual management fee that every fund has, although some funds drop their management fees as a come-on when they are starting up.

But you can skirt most of that and pay only a management fee if you do the research to find a no-load fund with a good record.

So that "ease of choice" stuff no longer applies. But it still makes sense, doesn't it, to own a fund to get the professional management that brings high returns compared with the stock market averages?

Not quite. It turns out that the average "general equity" fund didn't do as well as Standard & Poor's index of 500 stocks in the year that ended Sept. 30, according to Lipper Analytical Services, which crunches the numbers on mutual fund performance. In those 12 months the average stock fund gained 8.24 percent; the S.& P. gained 11.04 percent. Stock funds did even worse over the last five years, up 45.18 percent compared with 53.89 percent for the S.& P. 500.

And for the last 10 years, it was even bleaker, with the average stock fund gaining 292.64 percent, while the S.& P. soared 403.29 percent.

The discouraging statistics read like an advertisement for those no-brainer index funds that simply invest blindly in the stocks that make up the S.& P. 500.

Vanguard's Index Trust 500 Portfolio, for example, enjoyed annual compounded gains of 8.73 percent in each of the last five years, just under the 9 percent of the S.& P. 500.

At the Investment Company Institute, trade group for the mutual fund industry, the spokeswoman, Betty K. Hart, said it isn't fair to compare fund performance to that of the S.& P. The market averages are "artificial constructs with no operating costs at all," she said. Funds must pay their managers and pay commissions to buy and sell stocks, which cuts down on returns. In addition, she said, managers must keep some money in liquid Treasury bills and the like to redeem shares when investors want to sell. So "it's a little arbitrary to use the S.& P. 500," she said.

Yet that arbitrary index is the standard against which all money managers are judged by professional investors. So why not when the judges are individual investors?

For all their faults, mutual funds probably remain the best route for most investors. But it takes time as well as money to make the right choice. Donald Phillips, editor of Morningstar Mutual Funds, said businesses like his are booming because they provide interpretations of which funds are best and which are worst. "Five years ago, investors were asking 'Where do I get reliable information?' Today, their question is, 'How do I make sense of this overload of information?' "

The complications of so many choices are a negative for the industry, said Charles Trzcinka, finance professor at the State University of New York at Buffalo. "They could erode themselves right out of business if they're not careful with the myriad list of choices," said. "If you have to sit down and try to read all the literature, it's as difficult as it is to invest in a couple of companies."

Some investors respond by simply taking the time to research stocks, not funds. Thomas E. O'Hara, chairman of the National Association of Investment Clubs, said his group's 176,000 members are profiting nicely by buying stocks. They have achieved average gains of 13.9 percent a year in the 42 years of the organization's existence.

How do these nonprofessional investors do it? They do old-fashioned grunt research, said Mr. O'Hara. But the clubs may have fallen on another route to profits. Do they invite experts in to counsel them? we asked. "Oh no," Mr. O'Hara answered after a long chuckle. "I think that's our success."